In the wake of the Great Recession of 2007-2009 and the many bank failures that substantially contributed to the recession itself, the nation was calling out for laws ensuring that banks “too big to fail” never again caused a similar recession. Many found the idea that a bank could fail and then necessitate buyout on the taxpayers dime, and potentially deal a serious blow to the economy in the process, was particularly upsetting. While the fury of the nation was real, and the government began the process of attempting reforms, actually putting regulations into effect which held banks to a higher standard was more of an uphill battle than one might expect–even in the wake of huge bank buyouts shaking the economy to the core. However, in 2010 President Obama finally signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act–one of the most substantial banking reforms the nation has seen. Now, less than a decade later, one of President Trump’s recent executive orders threatens to remove the precautions against a repeat of the many bank failures in the early millennium.
The move isn’t necessarily a surprise, Trump and those close to him have repeatedly targeted Dodd-Frank as overly restrictive and bad for business–making investing more difficult than necessary. Trump was quoted during an open portion of a meeting with CEOs of businesses such as Wal-Mart and Pepsi stating that he would be “cutting a lot out of Dodd-Frank.” In truth, his position is even less of a surprise given that the law has been labeled by conservatives as government meddling with the private sector since it was first made law.
So now that Trump has come down on Dodd-Frank, it seems like a good time to explain exactly what Dodd-Frank does and what President Trump’s executive order does to Dodd-Frank.
What Does Dodd Do?
Dodd-Frank itself is an incredibly complex bit of legislation, the Act itself is over 800 pages long with over 240 individual rules. It’s one of the most substantial financial reforms in the history of the United States. It’s been compared to the changes that came after the Great Depression and, in fact, it includes some elements of the Glass-Steagall Act–a set of banking reforms which were put in place after the bank failures of the Depression.
Despite its complexity, Dodd-Frank’s most important changes can be fairly simply explained–although a complete understanding could fill volumes. Dodd-Frank creates a few new agencies which ensure the stability and best practices of banking institutions, requires greater government oversight of banking activities, removes Securities and Exchange Commission reporting loopholes, increases the amount a bank must keep in reserve to guard against economic downturns, and requires banks to keep larger portions of their money invested in things which can be easily turned into cash again. It also reintroduced Glass-Steagall, as mentioned above. Glass-Steagall was originally a law forbidding banks from running trading operations such as those that contributed to the real estate bubble, however the law had been systematically gutted since it was introduced back in 1933. Dodd-Frank reintroduced some of these limitations as the Volcker Rule–substantially limiting the ability of banks to run trading operations.
Where banks are particularly big, over $50B in assets, Dodd-Frank could requires annual stress tests–basically a report proving the bank could survive another recession like the one that just passed. The biggest banks, the Chases and Bank of Americas of the world, are required to submit a report every year describing how they could be dismantled without harming the economy–basically a will for their business.
The agencies created by Dodd-Frank include the Financial Stability Oversight Council, the Office of Financial Research, and the Bureau of Consumer Financial Protection. These all have duties regulating the banking industry and ensuring it’s stability. For instance, the Bureau of Consumer Financial Protection is tasked with protecting the public from deceptive, unfair, or abusive financial services. The Act also expands and changes the powers of existing regulatory agencies to some degree.
To sum it up, Dodd-Frank is put in place to make sure banks don’t go down a road that could lead to another Great Recession. Many consider it the only truly effective law of its type to be successfully enacted after the many bank buy-outs.
Trump’s Executive Order
Trump’s order, titled Presidential Executive Order on Core Principles for Regulating the United States Financial System, mostly puts forth seven principles of regulation which read as follows:
- empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
- prevent taxpayer-funded bailouts;
- foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
- enable American companies to be competitive with foreign firms in domestic and foreign markets;
- advance American interests in international financial regulatory negotiations and meetings;
- make regulation efficient, effective, and appropriately tailored; and
- restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.
On its face, this seems to almost support Dodd-Frank. The Act definitely is designed to help prevent taxpayer-funded bailouts; one of the stated goals of the order. However, a combination of context and another part of the act point in a different direction.
The order seeks to “make regulation more efficient.” This has been a hallmark of Trump’s statements and actions, an attempt to make regulations more efficient by removing them all. He recently signed an order requiring agencies to identify two restriction of any type which could be removed before any new restriction will be considered–an entire order that less regulation must always be better than more regulation regardless of what it might accomplish. That same order also puts a cap of $0 on the expenses involved in any new regulations in 2017. With this and Trump’s many statements on his preferred approach to Dodd-Frank in mind, the Core Principles order gives agencies 120 days to identify elements of Dodd-Frank that aren’t working.
This sends a message that Dodd-Frank is in line for a pruning. While Trump couldn’t do so explicitly by executive order, he can act through his many agency appointees to dismantle the rule in parts. This was how Glass-Steagall was gutted decades ago. He could reinterpret and alter the requirements of enforcement of Dodd-Frank and delay the implementation of some of its elements. He may not even need to however, Congress itself has begun attacking elements of the law–just recently introducing bills aimed at closing the doors on the Bureau of Consumer Financial Protection.
Who Does this Help?
A complete repeal and replacement of Dodd-Frank is unlikely to leave the banks particularly happy. They’ve already spent billions between them to ensure they are in compliance with Dodd-Frank, a new or changed set of regulations just makes them shell out to comply with it. However, relaxing or delaying parts of the law–especially those allowing them to invest more widely and with less reporting and oversight–would certainly be in their best interests.
The argument for reducing restrictions on banks has primarily been that less regulations will mean more money and easier investment and loan activity for banks. However, this is the exact situation we set out to avoid after bad bank investments led to bank failures which, just a few years back, brought our economy to such extreme lows. Without Dodd-Frank, or with a gutted version of it, we’ll just have to hope banks have learned their lesson.
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